Dysfunctional gas industry failing Australian consumers with inflated prices

As the Australian gas lobby pushes for government subsidies as part of the Covid-19 recovery plan, a new report from the competition regulator has slammed the gas industry for being ‘dysfunctional’, for failing Australian consumers, and charging local gas users prices substantially higher than those paid by overseas customers.

The ACCC’s Gas Inquiry 2017-2025 Interim Report delivers a damning assessment of the Australian gas market, detailing how Australian domestic consumers are paying almost double the equivalent price of gas sold into the export market, and the ACCC has issued a ‘please explain’ from local gas producers.

While the ACCC found that domestic gas prices had fallen slightly in 2019-20, ranging between $8 to $11 per gigajoule, they remained substantially higher than the equivalent ‘net-back’ price of gas received for gas sold into export markets by Australian producers, which have fallen to just $5.50 per gigajoule, and that the gap was growing.

“The ACCC is very concerned with the widening gap between domestic and export parity prices, which will have an inevitable impact on Australia’s industrial sector during what is already a difficult economic period,” ACCC Chair Rod Sims said.

“I am yet to hear a compelling reason from LNG producers as to why domestic users are paying substantially higher prices than buyers in international markets.”

“When we have lower gas prices around the world, and the Australian market linked to world gas markets, it is vital that Australian gas users get the benefit,” Sims added.

The ACCC observed that the gap between the higher prices paid by Australian gas users, and the lower prices received for gas sold for export had grown over the last 12 months, with the ACCC suggesting that further intervention into gas markets may be necessary to ensure local users were benefitting from lower global gas prices.

ACCC chair Rod Sims suggested that agreements between the federal government and gas producers should include greater linkages to the ‘net back’ price, so that domestic users were not paying substantially higher prices than the equivalent export price, particularly during a period of low international gas prices.

“The fact that LNG producers collectively sold 18 LNG spot cargoes into international markets at prices substantially below domestic gas price offers during this time increases our concerns about the level of competition in the market,” the ACCC report said.

“Viewed alongside the divergence between LNG netback prices and domestic prices, these sales highlight the need to better understand what is driving the price divergence and the importance of the ACCC’s further work in this area.”

The ‘net back’ price is a measure used to appropriately compare domestic gas and LNG export prices and represents the LNG export price minus the costs of liquefaction and transport.

The ACCC found that there will be sufficient gas supply for the Australian market in 2021, with surplus gas from LNG producers set to be redirected back into the local market.

The ACCC found that the performance of the gas sector during the Covid-19 pandemic had in fact highlighted the dysfunction within the gas market and that it was failing to support any form of recovery for local industrial users and manufacturers.

“The impacts of COVID-19 and the collapse in oil prices are being felt at all levels of the gas supply chain, and they have highlighted key areas of dysfunction in the market,” Sims said.

“The cumulative effect on gas users is significant and exacerbates the difficulties being experienced by many commercial and industrial users.”

The report comes as the chair of the National Covid-19 Commission advisory body, which features heavy representation from the oil and gas industry, revealed that it has advised the Morrison government that it should underwrite investments in expanded gas infrastructure, including larger pipelines.

The proposal has been slammed by environmental groups and energy market analysts, including think tank The Australia Institute.

“Having taxpayers underwrite new gas infrastructure as suggested by the Prime Minister’s Covid-19 Commission, when we have an excess of gas production is absurd,” the Australia Institute’s climate and energy program director Richie Merzian said.

“Instead of rushing to open up new gas fields the Federal Government should follow the ACCC recommendation to negotiate with LNG exporters to ensure more gas is made available to Australian customers at lower prices.”

Federal energy and emissions reduction minister, Angus Taylor, who has consistently advocated for a ‘gas-led’ economic recovery to Covid-19, said that he believed gas remained the key to a revival of manufacturing, despite the latest findings from the ACCC.

“Australia’s competitive advantage has always been based on cheap energy, particularly for the manufacturing sector,” Taylor said.

“Gas will be central to our ongoing economic recovery. A robust and competitive gas industry will allow both gas producers and users to thrive, with lower prices benefiting all Australians.”

Opposition spokesperson for climate change and energy, Mark Butler, questioned the Morrison government’s ability to deliver a ‘gas-led recovery’ when it couldn’t deliver fair prices for local users, citing the ACCC report.

“For seven years, the Liberal Government has dismally failed to ensure Australian users have access to affordable gas. This at the same time as Australia becoming the world’s largest gas exporter,” Butler said.

“Yet we are meant to believe this same Morrison Government has a plan for a ‘gas-led recovery’ when they can’t even solve their years old gas affordability and supply crisis. This is just another example of Scott Morrison’s marketing spin trumping reality.”